New Forms of Health Reimbursement Arrangements Coming in 2020
The Trump administration, in 2017, charged the Departments of Labor, Treasury and Health and Human Services with the task of making health reimbursement arrangements (HRAs) a more useful tool for employers wanting to offer broader coverage options and specifically to allow HRAs to be used for nongroup coverage. On June 13, 2019, Labor, Treasury and Health and Human Services (the Departments) released a final rule expanding the use of HRAs (the New Rule). The New Rule, which takes effect January 1, 2020, created two new forms of HRA, an individual coverage HRA (ICHRA) and an excepted benefits HRA (EBHRA) and it introduced a number of new provisions and requirements to accompany them.
But wait, you might ask: haven’t employers been forbidden, at risk of severe penalty to the employer and tax consequences to the employee, from paying premiums for any form of an employee’s individual coverage (with the exception of the little-used Qualified Small Employer HRA)? You would be correct and now in the spirit of making HRAs a vehicle for more employer/employee choice, the New Rule overrides the old rule and what was once not permitted, is now encouraged.
Below is a summary of the key provisions of the New Rule and at the end a discussion of potential implications for the group market and the brokers who serve it.
The Individual Coverage HRA
There are quite a few moving parts to the ICHRA, including requirements for employers and tax credit and enrollment implications for employees. Here are the highlights (for details see the Resources section):
- Employers can reimburse employees for individual coverage (defined by the New Rule as coverage offered in the individual market or fully-insured student health coverage).
- Employers can arrange to pay insurance carriers directly on behalf of the employee or reimburse the employee who has paid the carrier.
- There is no limit, except as set by the employer, on the amount an employer can reimbursement through an ICHRA.
- Reimbursements receive preferential tax treatment. They are not added to the employee’s taxable income (just as an employer’s contribution to an employee’s traditional fully-insured plan is not taxable) so long as the ICHRA has been implemented according to the New Rule and provided the reimbursable expense is permitted by the IRS.
- The ICHRA cannot pay for or reimburse: short-term limited duration insurance, excepted benefits coverage, health-sharing ministries or TRICARE.
- There are individual exchange tax credit considerations with ICHRAs as there are with traditional employer-sponsored coverage:
- An employee who participates in an ICHRA is not eligible for premium tax credits.
- An employee who is offered an affordable ICHRA is not eligible for premium tax credits, even if they do not participate in the ICHRA.
- However, if the ICHRA is not affordable and the employee opts out (a new feature in the New Rule that can be invoked once per year), the employee retains tax credit eligibility.
- Employees must be given the opportunity to opt out once per year and waive future HRA reimbursements (presumably they would do this because the HRA is not affordable or doesn’t offer minimum value and therefore applying for coverage with a tax credit, independent of the ICHRA is better).
- There is a formula for calculating the employee’s HRA contribution for purposes of calculating affordability, it is:
- The monthly premium for the lowest-cost silver plan for self-only coverage offered through the marketplace minus
- The monthly self-only HRA amount (the employer contribution).
- Once the employee’s contribution is known, the traditional ACA affordability calculation is performed to determine if coverage is affordable.
- If an employee first gains access to an ICHRA outside of the standard individual market open enrollment period, they can use a special enrollment period (SEP) created for this purpose. The SEP starts on the day the employee first gains access to the ICHRA and continues for 60 days. They must enroll in individual coverage during that SEP or wait until the next standard individual market open enrollment period.
- Employers must implement “reasonable” procedures to confirm that ICHRA participants are enrolled in qualifying individual coverage. The confirmations must occur at least once per year or each time a participant requests reimbursement through the HRA.
- It is possible for an employee, covered by an ICHRA, to contribute to a health savings account (HSA) if the HRA meets all the requirements of an HSA-compatible, high-deductible health plan.
Offering to Employees or Classes of Employees
There are numerous provisions regarding which employees or classes of employees can be offered what coverage and what defines a class:
- Employers cannot offer a traditional group plan and an ICHRA to the same employee or the same class of employees.
- For example, an employer can offer a traditional group plan to full-time employees and an ICHRA to part-time employees.
- An employer must offer every member of a class the same reimbursement amount with two exceptions, an employer may offer higher reimbursements based on age (capped at three times the amount reimbursed to the youngest participant) and family size (no cap).
- The New Rule expands the definition of a class and sets out many possible classes of employees:
- Full-time or part-time employees.
- Salaried or hourly employees.
- Seasonal employees.
- Temporary employees of staffing firms.
- Unionized employees, including those covered by a particular bargaining unit.
- Employees working in the same insurance rating area as defined by the ACA.
- Employees who have not met the employer’s waiting period for medical coverage.
- Nonresident aliens with no U.S.- source income.
- Any group of employees formed by combining two or more of the above classes.
- To offer an ICHRA to a class, there must be a minimum number of employees in the class. This is determined by the number of employees in the business. Following are the minimum class sizes based on employer size:
- Less than 100 employees – the minimum class size is 10.
- From 100 to 199 employees – the minimum class size is at least 10% of the total number of employees.
- Greater than 200 employees – the minimum class size is 20.
- Employers can offer the ICHRA to any former employee, but are not required to offer to all former employees even those from the same class. So, the offer can be on a case-by-case. However, if offered, the terms must be the same as provided to employees in the class the former employee was part of immediately prior to termination.
- Employers cannot offer an ICHRA to a non-employee such as a contractor since non-employees cannot be offered a tax-favored HRA.
ICHRA Notice Requirements
- The HRA must provide a notice to participants 90 days prior to the beginning of the plan year or by the individual’s hire date for new employees.
- The Department of Labor has developed this model notice for employers.
- The notice does not need to contain employee-specific information, so once tailored by the employer, for their use, it should not need to be modified.
The Excepted Benefits HRA
The EBHRA permits employers to pay for a wide range of premiums and expenses, including dental, vision, life, short-term plans and COBRA. Highlights:
- If any of the above coverages are an integral part of the group medical plan, they are not eligible for EBHRA reimbursement. They must be separate policies.
- An employer cannot offer the ICHRA and the EBHRA to the same employee or the same class of employees.
- Reimbursement is capped at $1,800/year per employee.
- An employee does not need to participate in a group medical plan in order to participate in an EBHRA.
- EBHRA reimbursements may not be used to pay premiums for individual health coverage, group health coverage or Medicare Parts A through D. Though it can reimburse for Medicare cost-share expenses.
- In a new twist, there are rules for determining if EBHRAs are harming the small group market. Comments regarding the New Rule brought out concerns that the EBHRA could encourage extensive migration of individuals from small group plans to short-term health plans. States can petition to have these HRAs limited if that is the case. The secretaries of HHS, Labor and Treasury decide whether to approve the petition.
Implications for the Group Market
The New Rule’s most impactful changes – giving employers the ability to pay, tax-exempt, an employee’s individual-market premiums and the establishment of a wide range of employee classes could have a major impact on the group market. The New Rule seems especially tailored to appeal to the small group market.
In 2017, the last year with full data, there were about 17 million individuals covered by small group plans (Kaiser Family Foundation). The Departments estimate that by 2029, 800,000 firms will offer ICHRAs and that 11.4 million individuals will participate in ICHRAs with about 7 million of those individuals coming from traditional group health plans. Assuming most (75% or 5 million) migrate from the small group market, that will create a 30% reduction in the small group market.
There are strong inertial forces that tend to slow the adoption of new rules like the New Rule. Employers and their advisors will need to understand these changes, compare their current offering with a potential new HRA offering not only as it impacts their bottom line, but as it impacts their employee’s perception of the benefit and then decide whether to jump into unfamiliar waters. If adoption of the QSEHRA, which has been available to small employers since 2017 is any indication, New Rule HRAs may be slow to catch on (to be sure though, the New Rule provides a much wider range of options for employers than the QSEHRA).
Finally, any discussion of the impact of the New Rule must consider how the broker will counsel his or her client. If the broker, as the primary benefits advisor for the small employer, is not supportive of a transition to ICHRAs, most employers will be hesitant to implement them. Brokers who serve their clients well, minimize the friction an employer encounters from the complex group benefits market. The many provisions and requirements that accompany the New Rule will add friction. It’s not clear if brokers will embrace ICHRAs and EBHRAs and if they are favorable, how they would be compensated. Trading the more lucrative group coverage commission for the minimal individual market commission could make ICHRAs an unprofitable proposition for brokers.
Perhaps to replace the group commission that would traditionally be paid by the carrier, brokers could change their revenue model for ICHRA business by generating income from three sources:
- There is no doubt that the employer will need a good third-party administrator (TPA) to handle the creation, maintenance, and compliance that is absolutely necessary for ICHRAs to be properly administered. Brokers could partner with TPAs and earn a residual on the business referred to those TPAs.
- For clients inclined towards ICHRAs and EBHRAs, a broker should consider converting their client relationship from a traditional carrier-paid model to a client-paid consulting model. The broker will be providing their client with a solution that may not only save money but provide more choice. However, that solution does not have the same revenue potential as traditional group coverage and so the broker must be compensated in some way for bringing the value of an ICHRA to their client and helping them manage this new benefit. This may be the right scenario to propose an ongoing consulting fee.
- Though it may not be in their DNA, group brokers may consider writing the individual policies that result from the ICHRA and collecting the commissions from them.
The New Rule goes into effect quickly, in less than six months. There will be a lot of publicity around ICHRAs and EBHRAs. Brokers who educate themselves and prepare to help their clients analyze this new alternative will be a step ahead.
Health Affairs Blog: Final Rule On Health Reimbursement Arrangements Could Shake Up Markets
Individual Coverage HRA and Excepted Benefits HRA: FAQs from the IRS
Contact the small group experts at 800.696.4543 or firstname.lastname@example.org.
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